Ryanair looks to cut fares and expand after record profit

DUBLIN (Reuters) - Ryanair (RYA.I) announced a record annual profit on Tuesday in a vindication of its strategy of cutting fares to boost market share, and said it would turn up the heat further on rivals.

Its warning to competitors came as one of them, British Airways, was counting the cost of a huge IT failure that left 75,000 passengers stranded over a holiday weekend.

Ryanair, Europe’s largest airline by passenger numbers, has helped drive down short-haul ticket prices in Europe by increasing its capacity by 33 percent, or about 30 million seats, in the past two years.

Its cost base, widely acknowledged as the lowest of Europe’s major carriers thanks to low plane purchase, maintenance and staff costs, has allowed it to undercut rivals while still making a profit.

The Irish airline made a profit after tax of 1.3 billion euros ($1.5 billion) in the year to the end of March, in line with analyst forecasts, even as it slashed ticket prices to fill almost 14 million seats added during the period.

“I take comfort from the fact that we can increase profit in a year where fares fall by 13 percent,” Chief Executive Michael O‘Leary told analysts.

“We have seen profitability double ... over a three year period and frankly I see no reason why that trend won’t continue.”

At 1400 GMT, Ryanair shares were up 2.5 percent at 18.185 euros.

FARE CUTS SLOWING

In the coming year, Ryanair is set to slow the pace of capacity growth to around 8 percent, or 10 million seats, and expects ticket prices to fall by 5-7 percent.

That will see its average fares fall by around 5 percent over the key summer months, likely putting pressure on rivals.

“I see a lot of airlines talking up the first half of the year and talking up (revenue per passenger) yield performance. I think that is a little overdone,” O‘Leary said.

British Airways owner IAG (ICAG.L) had said before its disastrous IT failure that it expected quarterly revenue per passenger mile flown to rise year-on-year for the first time since 2014 in April to June. Air France (AIRF.PA) and Lufthansa (LHAG.DE) have also said pricing and bookings are improving.

TARGET MARKETS

O‘Leary was upbeat about priority markets including Italy, where Ryanair expects Alitalia to cut its short-haul operations as part of restructuring, and Germany, where he said any acquisition of Air Berlin could open up airport slots.

Ryanair would be happy to sacrifice short term profitability to dislodge incumbents and open new markets, he added.

Ryanair is in talks with Boeing about buying up to five extra planes and extending the leases on 10 more over the next two years. In recent weeks, it has suggested it could source additional planes if AlItalia or Air Berlin were to free up capacity.

It has also spoken to around 200 airports about moving capacity from Britain in the event of a “hard Brexit,” where Britain would leave the EU’s single market, O‘Leary said.

In a sign of Ryanair’s financial confidence, it announced a 600 million euro share buyback to start immediately.

However, O‘Leary warned there were clouds on the horizon, including Brexit, which he has said could lead to a total breakdown in all flights between Britain and the EU for a time.

Brexit could also force some British investors in Ryanair to sell their stakes as EU airlines must be majority owned by EU nationals.

The impact on bookings of the recent suicide bombing in Manchester in which 22 people died was likely to be short-lived, but a further attack could knock bookings off course, he said.